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By Scott Regan, Unclaimed Property | February 20, 2020

The Altus Group Unclaimed Property team has learned that the office of the Delaware Secretary of State (DE SOS) is set to begin its 2020 enforcement campaign. The DE SOS announced that it will mail over 100 “invitations” to Delaware’s unclaimed property voluntary disclosure agreement program (VDA) to US corporations on February 20, 2020.

Delaware’s unclaimed property VDA letters are addressed to Chief Financial Officers and Delaware Registered Agents. As these notices are often overlooked, we encourage all Chief Accounting Officers, Controllers, Vice Presidents of Tax, Treasurers, Chief Compliance Officers and Legal Counsels to make immediate inquiries with the office of the CFO and the mail room. As we detail below, it is critical to respond to these letters in a timely manner. Failure to do so triggers significantly higher risk of material liability exposure, penalty, interest, as well as time investment and expense.

Delaware has long been the most the aggressive collector of unclaimed property. That state leverages the so called “second priority rule”, established by the US Supreme Court in Texas V New Jersey, to apply aggressive extrapolation techniques to extract large and previously unreserved unclaimed property liabilities from Delaware incorporated companies that cannot produce 15 years of researchable records. As nearly all companies are incorporated in Delaware, most US corporations are a target whether they have a history of compliance or not.

In 2017 Delaware amended its unclaimed property law to bifurcate its voluntary disclosure program (with the Secretary of State) from its audit program (with the Department of Finance). The new statute provides that companies may not be audited by the Delaware Department of Finance (DE DOF) until they have been invited to the Secretary of State’s VDA program. However, once invited by the DE SOS, companies must enroll in the VDA program within sixty days or they must be notified of unclaimed property audit by the DE DOF.

In 2019 it is estimated that the DE SOS mailed approximately 600 invitations to US companies incorporated in DE. Those letters were mailed in equal batches in February, May and September. Every company that failed to enroll in the DE VDA program has been notified of audit by the DE DOF.

Delaware’s unclaimed property audit program is far more intrusive with much greater liability exposure than the VDA program. The DE SOS’ role is to foster a positive relationship with corporate taxpayers. The VDA program was created specifically to provide a compliance path that treats corporations fairly and provides both a defined timeframe toward conclusion (12-18 months) and an avenue to address (rare) complaints regarding the DE SOS’s two vendors.

On the other hand, the DE DOF employs several third party contingently paid audit firms. Upon assignment of an audit these firms shop the assignment to their other state clients. Thus, a Delaware audit typically becomes a multi-state examination within weeks of commencement. The DE DOF and their contingent vendors are not constrained by time limits and these audits often last for years.

While both the VDA and audit program assert the right to extrapolate a liability using the second priority rule, the DE SOS affords corporations and their advocates significant leeway in strata selection and is committed to accepting reasonably formed positions. The DE DOF’s audit partners traditionally select aggressive strata to inflate a liability to the highest extent possible, while enforcing draconian record requests and ignoring pleas for more reasonable treatment.

In fact, so onerous is the perceived actions of the DE DOF and their primary vendor Kelmar Associates, that five companies have lawsuits pending in the US District Court of Delaware against the DE DOF and Kelmar, asserting that their audit techniques violate their rights under the Fourth, Fifth and Fourteenth amendments.  Four of these lawsuits have been filed since December 2019.

Uniformly, corporations prefer to be a part of the Delaware unclaimed property VDA program rather than the audit program. At Altus Group we noted a dramatic increase in enrollment in the VDA program in 2019 as awareness and education caused corporations to take immediate action upon receiving a letter.

Any company who receives an invitation from the DE SOS is encouraged to contact the Altus Group Unclaimed Property Team for a complementary consultation.  Even if a letter has not yet been received, best practices suggest that Delaware incorporated companies take proactive measures to minimize exposure.

At Altus Group we are deeply experienced in these matters and have affected dramatically positive outcomes for our clients. We will be pleased to talk over possible options and strategies for a response.

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